A downward sloping yield curve indicates which of the following scenarios?

A downward sloping yield curve, often referred to as an inverted yield curve, suggests that investors anticipate lower inflation in the future. This scenario typically occurs when long-term interest rates are lower than short-term rates. Investors may believe that the economy could be headed towards a slowdown, leading to expectations of reduced inflation rates down the line.

When investors forecast lower inflation, they may seek the safety of long-term bonds, pushing their prices up and thus reducing their yields relative to short-term bonds. This behavior reflects a cautious outlook on economic growth, as investors look for security in less volatile investments in an environment where they expect inflation to subside.

The other scenarios presented do not align with the implications of a downward sloping yield curve. Higher interest rates or rising economic growth would generally lead to a normal or upward sloping yield curve, while increased confidence in the economy would also typically shift yields upward, not downward.